How Far Can Electronic Arts Fall?

The game publisher just hit an unpleasant 52-week milestone.

Shares of Electronic Arts(Nasdaq: EA) hit a 52-week low yesterday. Let's take a look at how the company got there to find out whether cloudy skies remain on the horizon.

How it got hereIt has not been a good year for publicly traded gaming companies. Take-Two Interactive(Nasdaq: TTWO) is dawdling near its own 52-week lows. Social gaming stalwart Zynga(Nasdaq: ZNGA) has been one of the worst stocks on the market since its late-2011 debut. Even used-game retailer GameStop(NYSE: GME) has fallen on its face this year as digital delivery competition heats up.

The lone bright spot (if you can call it that) is Activision Blizzard(Nasdaq: ATVI), which remains flat for the past year despite record-breaking sales for its decade-in-the-making Diablo III. EA, for its part, hasn't yet reaped the fruits of its would-be World of Warcraft killer Star Wars: The Old Republic. Huge outlays on producing, supporting, and advertising the game returned a profit in the fourth quarter, but it wasn't enough to stem fears of widespread subscriber defections.

What you need to knowGame companies are all over the map numbers-wise. EA sits in the middle of the pack, with a slim net margin and a high P/E. As you'll soon see, that's a rarity for EA, which hasn't seen positive earnings for years.

This discrepancy isn't all that unusual -- Zynga, despite being unprofitable on its income statement, reports solid cash flow. EA's price to free cash flow is slightly better than its P/E, sitting at 35.1 at the moment. That's not all too reassuring for investors threatened not only by possible weakness in the company's flagship MMO, but by the trend toward cheaper, quicker, smaller games spurred by mobile devices. If Activision can't deliver big gains despite breaking sales records every year, what hope does EA really have for long-term outperformance?

What's next?Where does EA go from here? That will depend, in large part, on the long-term success of The Old Republic. If subscribers stick around, EA could finally have the stable cash flow needed to push back against Activision's dominance. The company's social push, which now includes top Facebook titles The Sims Social and SimCity Social, has yet to bear profitable fruit, but is also worth watching.

The Motley Fool's CAPS community has given EA a two-star rating. Although 88% of our CAPS players expect the stock to reverse its slide, many are only willing to offer bullish sentiment for the short term, which explains the stock's low rating.

Author

Alex Planes specializes in the deep analysis of tech, energy, and retail companies, with a particular focus on the ways new or proposed technologies can (and will) shape the future. He is also a dedicated student of financial and business history, often drawing on major events from the past to help readers better understand what's happening today and what might happen tomorrow.